SEC Grows Suspicious of Declining Auditor Fees
February 28, 2014 Leave a comment
February 24, 2014, 1:48 PM ET
SEC Grows Suspicious of Declining Auditor Fees
Senior Editor
U.S. securities regulators are wary that pressure to reduce auditor fees could lead to worse audits.
Regulators grow “worried” when auditor fees appear to fluctuate with economic cycles, Paul Beswick, chief accountant at the Securities and Exchange Commission, said at a Practising Law Institute conference in Washington, D.C., on Saturday.
“I wouldn’t actually think audit fees should fluctuate with the state of the economy,” Mr. Beswick said. “In fact, as the economy gets worse, I would think the auditors need to spend more time.”
In financial crises, it is common for companies to say they are cutting payments to vendors by a certain percentage across the board, but Mr. Beswick says he’s heard “horror stories” about companies applying the same pay cuts to their auditors.
When companies switch their audit firms they often receive initial year fee discounts from auditors, but Mr. Beswick cautioned that companies should be careful that a lower audit fee isn’t the primary motivation for switching firms.
Auditors themselves often propose a lower fee for the initial year audit as an incentive to win business. In recent years, when companies switch from a Big Four accounting firm to a non-Big Four firm, audit fees declined about 62% of the time, while audit fees declined about 38% of the time when companies switch between Big Four firms, according to research from professors at the State University of New York at Old Westbury and Florida International University.
“We keep hearing stories about some audit committees fee-hunting,” Mr. Beswick said. Audit committees are in charge of appointing the auditor, but requesting a lower fee from an incoming auditor might not fully appreciate the economics of audit work, Mr. Beswick said.
Audit committees could also run into legal issues in cases where an auditor fee reduction is followed by a material misstatement, and shareholders or regulators may be concerned that board members violated their fiduciary duty, he said.
Fee cuts can put “pressure on the nature of the services,” Mr. Beswick said.
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